MLP's--A Necessary Component of Your Portfolio

The markets hit new highs for the year today. Nasdaq is up 58% from it's lows in March and crossed 2,000 for the first time since last October. The S&P crossed 1000 and is up 50% from the lows. I guarantee there are people reading this who sold out of positions at the lows and went to cash. It was scary back then and I agree that it was prudent to get out of some of the riskier stocks where bankruptcy was a real possibility (Citi, AIG, even B of A before the gov't came in), and go defensive. Oil went from $147 last July to the low 30's earlier in the year and currently up to $72.

The volatility of the last year is unprecedented and has also provided the opportunity to make a lot of money. If you bought into the stock market 10 years ago, you would have slightly less money than what you started with. That's not exactly a great investment right? Not only did you lose money, you didn't even get to enjoy it. Might as well have taken a nice vacation. You need to have components in your portfolio that you can rely on and you need to have a strategy. Dividend paying stocks and interest paying debt instruments are essential.

Dividends and bonds give your portfolio breathing room of 5-15% that's income you can rely on. When the markets are in a free fall, you have to go back to the basics of the market. What do people need to live on? Food, medicine, and energy come to mind. Where are there monopolies? They still exist. You only have one choice if you want gas and energy in your house right? You look for business' that can survive without needing to borrow money and have cash coming in that you can count on.

There's a group of stocks called Master Limited Partnerships (MLP's), which are primarily comprised of energy pipeline companies that own and lease thousands of miles of pipeline to transport and store natural gas or any other liquid. Many have virtual monopolies in the states that they operate in. The beauty of them is they're tax advantaged so long as they pass on at least 90% or their earnings to their investors. They have a great history of cash distributions anywhere from 7-20%!! They have also outperformed the broader market for the better part of this decade. The group hasn't been immune from the credit crunch though, but that's why valuations are still compelling. They've rebounded nicely with the market since March and the yields are still juicy. My top picks are KMP, OKS, PAA, and EPD. I would choose the larger, more stable ones that can handle their debt during what is sure to be continued tough economic times for years to come. I think can establish a position right now and dollar cost average your price down over time and definitely reinvest your dividends!!

Happy Investing,

Ivan

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